5 Things You Didn’t Know About Climate Change’s Financial Effects
There’s no question of there being a financial cost to mitigating and adapting to client change. The oft-quoted number (from CERES) is a $1 trillion investment annually to keep temperatures within the target range. This is important because as climate change escalates, weather will become more volatile and the loss of human life — not to mention the endangered plant and animal species — will increase.
Many of the people who will be hardest hit live in developing nations and other volatile areas, putting them especially at risk and in need of financial support and innovation. For example, climate scientists suggest that the Middle East and North Africa could become completely uninhabitable by 2100 if climate change is not curbed. But climate change will have far-reaching effects, even for those who don’t live in a risk-prone area. One key area where everyone will have to face the implications of climate changes is the economy. Here’s X things you might not have known about the chaos climate change will wreak, financially speaking.
- Climate Change Puts Businesses in All Sorts of Industries at Risk
Food producers and the energy sector are two areas where everyone knows climate change will have an effect. More severe weather will cause destructive storms, droughts, heat waves, and other situations that will lead to crop shortages. As the need for renewable energy increases, those who hold investments in fossil fuels may be left with “stranded” assets — meaning they could easily become a liability.
But those are far from the only industries that will feel the burn, so to speak. Manufacturers could face higher prices for raw goods as competition for scarcer and scarcer resources increase. (A PWC study found that mining would also be affected by climate change.) As environmental assets die out or are destroyed, tourism in places like Hawaii could drop, causing businesses that rely on visitors, not just locals, to feel the effects. That includes hotels and restaurants, among many others, as just one example.
The PWC study also emphasizes that climate change will have a ripple effect. What affects one industry, one country, or even one business could carry over to others.
Perhaps the most concerning is that a survey of S&P Global 100 companies, done by the Center for Climate and Energy Solutions, found that just 28% of those companies had done risk assessments, and even fewer companies were using climate-specific tools to do their assessments.
2. Your Retirement Savings are at Risk
On a more personal level, climate change inaction (or a failure to mitigate the effects of climate change) could harm your retirement savings. According to a Huffington Post article, many investment funds (and by extensions, their managers) have not considered the risk of climate change at all. Specifically, 117 U.S.-based investment funds with a whopping $4.6 trillion in assets have taken zero action on this front.
Not only that, but bear in mind that businesses in many — if not all — industries are already at risk from climate change. Any company could be hard-hit by a natural disaster, resource shortage, or worse, which could lead to a financial crisis, a reputation crisis, or any number of other situations that could negatively affect stock values.
The good news is that any company is capable of adapting. Businesses can, and are, taking steps to address climate change (though as stated above, a greater number should do so). They are also acknowledging stakeholder needs for transparency, and are publicizing their efforts. For investors, this makes it easier to identify the best options to incorporate in a portfolio.
3. Global Productivity Could Seriously Drop
Inhospitable climates, droughts, natural disasters, and other effects of climate change could lead to a decrease in global economic output to the tune of 23% by 2100. That number is often regarded as a worst-case scenario, but a study by Nature found that it was substantially more likely given the current climate change numbers. For a frame of reference, real GDP in the U.S. declined by 30% during the Great Depression, with unemployment numbers generally accepted to have peaked above 20%. The 1981-1982 recession saw just a 2% decrease in GDP, while the 2008-2009 recession led to a 5% drop. In both of these later recessions, unemployment peaked at approximately 10%.
Now imagine that on a global scale.
- We Could See Serious Inflation
Rising prices brought on by increased costs of manufacturing and scarcer materials could trigger inflation. This is a normal part of the economic process, and typically corresponds to a drop in interest rates, which may be beneficial, at first. However, if inflation increases, it could spiral out of control, and could have negative impacts on financial investments such as bonds, in particular.
- Our Current Risk Assessments May Only be Scratching the Surface
Climate science is by no means perfect, and the same extends to data modeling. It’s not enough to look at climate change from a scientific standpoint, or only a financial standpoint. A truly cross-discipline approach is absolutely necessary to effectively gauge the potential impacts and risk. An article in the Feb 2016 issue of Nature highlights that as being a key factor in why many current climate models are inaccurate or misleading, which means that the estimated impacts could be much more severe and necessitate greater action to combat the threat.
